50-Off Stores, Inc. v. Banques Paribas (Suisse), S.A.

• Decision Date: 01 July 1999
• Docket Number: No. 98-50288,98-50288
• Citation: 180 F.3d 247
• Parties: 50-OFF STORES, INC., Plaintiff-Appellee, v. BANQUES PARIBAS (SUISSE), S.A., et al., Defendants, Howard White, Third Party Plaintiff, v. The Chase Manhattan Bank, N.A., Defendant-Third Party Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 247

180 F.3d 247

50-OFF STORES, INC., Plaintiff-Appellee, v. BANQUES PARIBAS (SUISSE), S.A., et al., Defendants, Howard White, Third Party Plaintiff, v. The Chase Manhattan Bank, N.A., Defendant-Third Party

Defendant-Appellant.

No. 98-50288.

United States Court of Appeals, Fifth Circuit.

July 1, 1999.

Barry A. Chasnoff, Saul Howard Perloff, Stephan B. Rogers, Daniel McNeel Lane, Akin, Gump, Strauss, Hauer & Feld, San Antonio, TX, for Plaintiff-Appellee.

David Balabanian, David M. Heilbron, Russell K. Yoshinaka, McCutchen, Doyle, Brown & Enersen, San Francisco, CA, John L. Hill, Jr., Locke, Liddell & Sapp, Houston, TX, Joseph Latting, Kamela Stroman Bridges, Locke, Liddell & Sapp, Austin, TX, for Chase Manhattan

Page 446609

Bank, N.A.

Appeal from the United States District Court for the Western District of Texas.

Before DAVIS, STEWART and PARKER, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

Defendant-Appellant The Chase Manhattan Bank, N.A. ("Chase") appeals a jury verdict in excess of $150 million in compensatory, consequential, and punitive damages for the conversion of 1.5 million shares of stock of Plaintiff-Appellee 50-Off Stores, Inc. ("50-Off"). For the reasons that follow, we vacate the awards of punitive damages and prejudgment interest and uphold the awards of compensatory and consequential damages.

I.

We review the record, including factual and credibility determinations and the reasonable inferences that may be drawn therefrom, in the light most favorable to the verdict. Denton v. Morgan, 136 F.3d 1038, 1044 (5th Cir.1998). When viewed in such a light, the central facts of this case are as follows.

Plaintiff-Appellee 50-Off operated a chain of discount retail stores headquartered in San Antonio, Texas. ¹ In October 1994, 50-Off decided to raise money through a stock offering in order to purchase inventory for the Christmas shopping season. 50-Off engaged experienced professionals, including the investment banking firm of Jefferies & Co. ("Jefferies"), to help them orchestrate the stock offering. In order to avoid the regulatory rigors of a full-blown stock offering, 50-Off decided to issue stock through Regulation S, which excused it from many of the requirements of the Securities Act of 1933. The offering under Regulation S, however, had at least one major disadvantage: the stock being issued could only be sold to foreign investors for the first forty days after closing.

50-Off and their law firm Akin, Gump, Strauss, Hauer & Feld, along with Jefferies and their law firm Morgan, Lewis, and Bockius, prepared a form subscription agreement. This agreement required payment on delivery and required that the stock bear a six-month restrictive legend. On November 8, 1994, using this form subscription agreement, 50-Off sold 310,000 shares of stock at $3.75 per share to Swiss and British investors.

Around this time, Howard White called Chris Jensen, an attorney for Jefferies. White stated that he was a lawyer who represented Banques Paribas (Suisse), S.A. ("BPS"), a major European bank. ² He stated that BPS wished to purchase 1.5 million shares of 50-Off stock at $3.65 per share. He then introduced Jensen to three companies: Andalucian Villas (Forty-Eight), Ltd., Arnass, Ltd., and Brocimast Enterprises, Ltd. White indicated that these companies were owned by BPS, or at least closely affiliated with the bank. In reality, however, these three companies were offshore shell corporations of Yanni Koutsoubos, a BPS customer and, as 50-Off would later discover, an international white collar criminal.

White proposed subscription and escrow agreements more complex than those prepared by 50-Off, Jefferies, and their law firms. Under White's proposed agreements, the stock would be delivered to an escrow agent unpaid for and without a restrictive legend. The escrow agent was to deliver the stock to a bank for authentication in return for an "irrevocable bank payment guarantee." 50-Off understood that the bank would hold the stock until payment was received. Jensen and John Patrick Ryan, 50-Off's attorney, determined that White's proposed agreements satisfied Regulation S and therefore agreed to them. Dennis Morris, a Canadian attorney, was selected as the escrow agent.

On November 9, 50-Off received the executed subscription and escrow agreements. The next day, 50-Off issued 1.5 million unlegended ³ shares in BPS's name and delivered these shares to Morris. Chase Account Administrator Miha Zajec instructed White on the procedure for delivering the securities to Chase. White passed these instructions on to Morris. Morris, in turn, instructed a courier, William Jackson, to deliver the shares to Chase. Morris provided a letter to accompany the deposit stating, "These shares have a debit balance due."

On November 14, BPS, a long-time Chase customer, instructed Chase, "Please accept free ⁴ for our account PS 97824 from Dennis S. Morris" the 1.5 million 50-Off shares. In sending this instruction, BPS was acting on behalf of its customer Koutsoubos.

Also on November 14, Jackson delivered the shares to Chase's physical receive window as per Morris's instructions. At the window, Jackson asked for Zajec, the Chase representative who had provided the delivery instructions. The employee at the window stepped away to call Zajec. The employee soon returned with Tony Dinalfo, another Chase employee, to whom Jackson pointed out the "debit balance due" language. At trial, Jackson testified,

I showed them the fact that there was a debit balance, and that they should be aware of this because the stock is not paid for, and the bank is acting as a temporary custodian, intermediate to delivering these shares to the ultimate holder, and that they should get paid for these shares and pay us for them, or the Dennis Stephen Morris [firm].... That this debit balance was a debt or a credit that they owed for the shares, and if they sent them onwards they should then get paid and transmit it back.

Dinalfo indicated that he understood, initialed parts of the delivery forms--including the statement that the shares had a "debit balance due"--and accepted possession of the stock. Dinalfo then placed an identification number known as a restrictive CUSIP on the shares, presumably to indicate that the stock had not been paid for. The same day, Chase sent Morris a receipt acknowledging the deposit of the stock. The receipt stated, "These shares have a debit balance due against them."

Thus, on November 14, 1.5 million unpaid-for and unlegended 50-Off shares, registered to BPS, were deposited at Chase. These shares were initially placed in a "holdover" account--an account used, for among other things, to hold shares pending payment. At trial, Chase was unable to present the holdover account records for November 1994. Chase contended that these records had been destroyed, as is customary in the industry. Chase, however, was able to produce the holdover account records for October 1994. Chase was also unable to produce a delivery ticket--the record made of every delivery of stock to Chase--for the November 14 deposit. According to one of Chase's witnesses, Frank DeCicco, delivery tickets indicate whether stock is delivered free or if payment is due. 50-Off argued that the missing delivery ticket was consistent with the receipt and indicated that a payment was due on the 50-Off stock.

As previously noted, on November 14, Chase's customer, BPS, sent a message stating the stock is "free" and yet the deposit information indicated that the stock had a debit balance due. Walter Cushman, one of Chase's expert witnesses, testified that when the delivery instructions and the customer's instructions are inconsistent, the stock is either held in a holdover account until the discrepancy is resolved or it is returned to the deliverer. Similarly, BPS Account Officer Ramys Molteni agreed that such a discrepancy should be corrected before the stock is deposited into the customer's account.

Chase, however, either did not notice this discrepancy or ignored it. BPS, presumably instructed by Koutsoubos, told Chase to deposit the 50-Off stock into BPS's account. Chase acted as instructed. 50-Off argued that when Chase deposited the stock "free" into BPS's account on November 18, 1994, Chase converted the stock.

The subscription agreement called for payment for the 1.5 million shares by November 25. The payment did not arrive as scheduled. 50-Off, believing that the shares were deposited in Chase under Morris's control, still attempted to close the deal. On November 30, Koutsoubos indicated that payment for one million shares was being sent. On December 2, however, Koutsoubos complained that 50-Off should have disclosed their October sales figures to him and asked that the purchase price be lowered. On December 8 or 9, 50-Off lowered the price to $3.25 per share. On December 22, 50-Off further lowered the price to $2.66. On December 29, Koutsoubos explained that he would not be able to pay for the shares until January 3, 1995, because his bank officer was on vacation. On January 18, Koutsoubos stated that a representative of 50-Off should come to Lugano to get paid.

In the meantime, BPS authorized Chase to transfer the 50-Off shares into one of Chase's street names, Egger & Co ("Egger"). On January 19, Zajec transferred the shares. Upon learning that the shares had been reregistered into the Egger account, Ryan, 50-Off's counsel, contacted Joel Brimmer, a Security Control Analyst at Chase involved in the stock transfer. On January 26, Ryan told Brimmer that the shares had still not been paid for and asked why they had been reregistered. Brimmer indicated that he would contact the "appropriate" person. On January 27, Ryan faxed Brimmer and Morris a letter expressing concern and stating that the shares had not yet been paid for. In this letter, he referenced his conversation with Brimmer the previous day. This letter stated, among other things,...